<PAGE>
================================================================================
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1999
Commission File Numbers: 333-64449-02
333-64449-01
333-64449
Coaxial LLC
Coaxial Financing Corp.
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their charters)
Delaware Applied for
Delaware Applied for
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
c/o Insight Communications Company, L.P.
126 East 56th Street
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 371-2266
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. [X ] Yes [_] No
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Coaxial Communications of Central Ohio, Inc. Not Applicable
Phoenix Associates Not Applicable
Insight Communications of Central Ohio, LLC Not Applicable
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Coaxial LLC
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Operations
and Changes in Member's Deficit for the three months
ended June 30, 1999 and for the six months ended
June 30, 1999 (unaudited) 2
Consolidated Statement of Cash Flows
for the six months ended June 30, 1999 (unaudited) 3
Notes to Interim Consolidated Financial Statements (unaudited) 4
Coaxial Financing Corp.
Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 10
Notes to Interim Balance Sheets (unaudited) 11
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 12
Consolidated Statements of Operations and Changes in
Shareholders' (Deficit) Equity for the three months ended
June 30, 1999 and 1998 and for the six months ended June 30,
1999 and 1998 (unaudited) 13
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998 (unaudited) 14
Notes to Interim Consolidated Financial Statements (unaudited) 15
Phoenix Associates
Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 21
Statements of Operations and Changes in Partners' Deficit
for the three months ended June 30, 1999 and 1998 and for
the six months ended June 30, 1999 and 1998 (unaudited) 22
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited) 23
Notes to Interim Financial Statements (unaudited) 24
Insight Communications of Central Ohio, LLC
Balance Sheet as of
June 30, 1999 (unaudited) and December 31, 1998 27
Statements of Operations and Changes in Members' Deficit
for the three months ended June 30, 1999 and for
the six months ended June 30, 1999 (unaudited) 28
Statement of Cash Flows for the six months
ended June 30, 1999 (unaudited) 29
Notes to Interim Financial Statements (unaudited) 30
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K 40
</TABLE>
<PAGE>
Coaxial LLC
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------- ------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,265 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $438 and $306 in 1999 and 1998 969 1,186
Other accounts receivable, less allowance for doubtful accounts
of $145 in 1999 and 1998 1,629 1,520
Prepaid expenses and other current assets 237 166
--------------- ---------------
Total current assets 5,100 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 80,698 71,032
Equipment 7,744 7,102
Furniture 349 333
Leasehold improvements 71 71
--------------- ---------------
89,122 78,798
Accumulated depreciation and amortization (50,122) (46,898)
--------------- ---------------
Total property and equipment, net 39,000 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,385 7,385
Deferred financing costs and other 3,108 2,712
--------------- ---------------
10,493 10,097
Accumulated amortization (7,585) (7,436)
--------------- ---------------
Total intangible assets, net 2,908 2,661
Note receivable Coaxial DJM LLC 6,750 6,750
Note receivable Coaxial DSM LLC 3,000 3,000
Due from related parties 1,320 640
--------------- ---------------
Total other assets 13,978 13,051
--------------- ---------------
Total assets $ 58,078 $ 56,532
=============== ===============
LIABILITIES AND MEMBER'S DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,171 3,230
Accrued interest 1,307 1,250
Accrued liabilities 4,716 4,404
--------------- ---------------
Total current liabilities 10,267 9,007
NOTES PAYABLE:
Senior discount notes 33,576 31,511
Senior notes 34,435 34,435
--------------- ---------------
Total notes payable 68,011 65,946
Capital lease obligations 105 105
Other liabilities 1,172 1,146
Due to related parties 756 1,029
--------------- ---------------
Total liabilities 80,311 77,233
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (22,233) (20,701)
--------------- ---------------
Total liabilities and member's deficit $ 58,078 $ 56,532
=============== ===============
</TABLE>
See accompanying notes
1
<PAGE>
Coaxial LLC
Consolidated Statements of Operations and Changes in Member's (Deficit)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ -----------------
<S> <C> <C>
REVENUES $ 11,697 $ 23,393
OPERATING EXPENSES:
Service and administrative 6,560 13,241
Depreciation and Amortization 1,647 3,247
------------------ -----------------
Total operating expenses 8,207 16,488
------------------ -----------------
OPERATING INCOME 3,490 6,905
OTHER INCOME 79 79
INTEREST INCOME (EXPENSE), net
Interest income 342 757
Interest expense (1,959) (3,926)
------------------ -----------------
Total interest expense, net (1,617) (3,169)
------------------ -----------------
NET INCOME 1,952 3,815
MEMBER'S (DEFICIT), beginning of period (23,944) (20,701)
MEMBER DISTRIBUTIONS (241) (5,347)
------------------ -----------------
MEMBERS' (DEFICIT), end of period $ (22,233) $ (22,233)
================== =================
</TABLE>
See accompanying notes
2
<PAGE>
Coaxial LLC
Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,815
Adjustments to reconcile net income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3,373
Accretion of original issue discount on senior 2,065
discount notes
Changes in certain assets and liabilities
Subscriber receivables 217
Other accounts receivable, prepaid expenses and other
Current assets (180)
Accounts payable and accrued liabilities 1,279
Accrued interest 57
Due to related parties (953)
--------------------
Net cash provided by operating activities 9,673
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other intangibles (396)
Capital expenditures for property and equipment (10,324)
--------------------
Net cash used in investing activities (10,720)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (50)
Capital distributions (5,347)
--------------------
Net cash used in financing activities (5,397)
--------------------
NET DECREASE IN CASH (6,444)
CASH, beginning of period 8,709
--------------------
CASH, end of period $ 2,265
====================
</TABLE>
See accompanying notes
3
<PAGE>
COAXALL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization And Purpose
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67.5% of the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial"). The Company has an individual
as its sole member.
Coaxial, an Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
Columbus, Ohio and surrounding areas. In connection with the contribution of
Coaxial's cable system to Insight Ohio described below, the issuance of the
senior notes described in Note 4, and the issuance of the senior discount notes
by the Company during 1998, the three individuals who previously owned the
outstanding stock of Coaxial contributed their stock to three separate limited
liability companies including the Company. Accordingly, effective August 21,
1998, the Company owns 67 1/2% of the outstanding stock of Coaxial.
Other related entities owned or controlled by the majority shareholder of the
Company include Phoenix Associates ("Phoenix"), Coaxial Communications of
Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of Columbus I
("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"), Paxton Cable
Television, Inc. ("Paxton Cable") and Paxton Communications, Inc. ("Paxton
Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of this
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and
Insight owns 75% of the non-voting common equity of Insight Ohio. Coaxial also
owns two separate series of voting preferred equity (a $140 million preferred
equity interest and a $30 million preferred equity interest) of Insight Ohio.
The voting preferred equity interest will provide for distributions to Coaxial
and indirectly to Phoenix and the Company in amounts equal to the payments
required on the senior and senior discount notes described in Note 4. IHO serves
as the manager of Insight Ohio.
The Company and Coaxial Financing Corp. are co-issuers of notes payable
described in Note 4(b). Coaxial and Phoenix are co-issuers of the notes payable
described in Note 4(a). The ability of Coaxial Financing Corp., the Company,
Coaxial, and Phoenix to make scheduled payments with respect to the senior and
senior discount notes is dependent on the financial and operating performance of
Insight Ohio. The required distributions on the Series A and Series B Preferred
Interests to Coaxial are designed to provide the cash flow necessary to service
the debt service requirements on the senior and senior discount notes.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999.
4
<PAGE>
COAXALL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
2. Basis of Presentation (continued)
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
3. Summary Of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
Coaxial, and Insight Ohio. All intercompany balances have been eliminated in
consolidation. At June 30, 1999, Coaxial had a shareholders' deficiency and
Insight Ohio had a members' deficiency. Accordingly, the accompanying financial
statements do not include any minority interest liabilities.
Cash
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current asset and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
At June 30, 1999, the carrying value of the notes receivable from Coaxial DJM
LLC and Coaxial DSM LLC and the senior and senior discount notes approximate
their fair value.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at June 30, 1999 were not
significant.
5
<PAGE>
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary Of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of June 30, 1999, the Company
had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At June 30, 1999 the Company had net assets held under capital leases of
$178,000.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate primarily to legal fees and bank facility fees
incurred to negotiate and secure long term financing (see Note 4). These costs
are being amortized on a straight-line basis over the life of the applicable
loans. The Company amortized to interest expense deferred financing costs of
approximately $89,000 and $158,000 for the three and six months ended June 30,
1999.
Home Office Expenses
Effective August 21, 1998, Insight Ohio entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee of equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under the management agreement aggregated $351,000 and $727,000 for the
three and six months ended June 30, 1999.
6
<PAGE>
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
4. Notes Payable
Notes payable at June 30, 1999 and December 31, 1998 consisted of:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------------- ---------------------
<S> <C> <C>
Lender
------
Senior notes(a) $ 34,435,000 $ 34,435,000
Senior discount notes(b) 33,576,000 31,511,000
--------------------- ---------------------
Total notes payable $ 68,011,000 $ 65,946,000
===================== =====================
</TABLE>
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interests to make payments
on the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
incurred financing fees of approximately $1,226,000 that are being
amortized over the life of the Senior Notes. Coaxial, as joint and several
issuer, with Phoenix, of the Senior Notes, provides the funding that will
allow Phoenix to repay its share of the notes payable, as Phoenix has no
operations.
7
<PAGE>
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(a) (continued)
Amortization expense for deferred financing costs related to the Senior
Notes for the three and six months ended June 30, 1999 was approximately
$39,000 and $75,000. Interest expense on Coaxial's portion of the Senior
Notes was approximately $861,000 and $1,722,000 for the three and six
months ended June 30, 1999.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
bank which provides for revolving credit loans of $25 million to finance
capital expenditures and for working capital and general purposes,
including the upgrade of the System's cable plant and for the introduction
of new video services. The Senior Credit Facility has a six-year maturity,
with reductions to the amount of the commitment commencing after three
years. The amount available for borrowing is reduced by any outstanding
letter of credit obligations. Insight Ohio's obligations under the Senior
Credit Facility are secured by substantially all the tangible and
intangible assets of Insight Ohio. Loans under the Senior Credit Facility
bear interest, at Insight Ohio's option, at the prime rate or at a
Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Discount Notes in the event of a payment default
under the Senior Credit Facility, create liens on assets, make investments,
make acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Senior Credit Facility requires
compliance with certain financial ratios, including with respect to total
leverage, interest coverage and pro forma debt service coverage.
Management does not expect that such covenants will materially impact the
ability of Insight Ohio to operate its business. As of June 30, 1999, no
amounts were drawn on the Senior Credit Facility.
(b) On August 21, 1998, the Company and Coaxial Financing Corp., a related
entity, issued senior discount notes ("Senior Discount Notes") due 2008.
The Senior Discount Notes have a face amount of $55,869,000 and
approximately $30 million of gross proceeds were received upon issuance.
Approximately $19.5 million of the gross proceeds were contributed by the
sole member of the Company to certain related entities to repay the
indebtedness. Approximately, $9,750,000 was loaned to two related entities
by the Company, which then contributed that amount to certain other related
entities to repay indebtedness. The debt discount of $25,868,000 is being
amortized over five years (until August 15, 2003). Thereafter, interest on
the Senior Discount Notes accrues at 12 7/8% and is payable semi-annually.
All of the Senior Discount Notes were allocated to the Company.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1,465,000 that are being
amortized over the life of the Senior Discount Notes. Amortization expense
related to the deferred financing costs was approximately $37,000 and
$69,000 for the three and six months ended June 30, 1999. Interest expense
incurred on the Senior Discount Notes excluding amortization of deferred
financing costs was approximately $1,026,000 and $2,051,000 for the three
and six months ended June 30, 1999.
The Senior Discount Notes are non-recourse, secured by all of the common
stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM
LLC to the Company and conditionally guaranteed by Insight Ohio, a
subsidiary of Coaxial.
8
<PAGE>
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(b) (continued)
Among other covenants, the borrowers must comply with restrictive
covenants relating to incurrence of additional debt, payment of
dividends and distributions, and the transfer or sale of assets.
Coaxial Financing Corp., and the Company were in compliance with these
covenants as of June 30, 1999.
The ability of Coaxial Financing Corp., and the Company to make
scheduled payments with respect to the Senior Discount Notes will
depend on the financial and operating performance of Insight Ohio. The
required payments on the Series B Preferred Interests equal the
distributions to be made by Coaxial to the three limited liability
companies that own Coaxial to service the Senior Discount Notes.
5. Commitments and Contingencies
The Company is party or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
of financial position.
9
<PAGE>
COAXIAL FINANCING CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS:
Cash $ 1,000 $ 1,000
------------- -----------------
Total assets $ 1,000 $ 1,000
============= =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior discount notes (to be paid by Coaxial LLC - See Note 3) $ - $ -
------------- -----------------
Total liabilities $ - $ -
Common stock, $.01 par value; 1,000 shares authorized, 1,000
shares issued and outstanding 10 10
Additional paid-in capital 990 990
------------- -----------------
Total liabilities and shareholders' equity $ 1,000 $ 1,000
============= =================
</TABLE>
See accompanying notes
10
<PAGE>
COAXIAL FINANCING CORP.
NOTES TO INTERIM BALANCE SHEET
(UNAUDITED)
JUNE 30, 1999
1. Nature of Business
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998 for the sole purpose of being a co-issuer of the discount notes
described in Note 3, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
3. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Discount Notes") due 2008. The Discount Notes have a face
amount of $55,869,000 and approximately $30 million of gross proceeds were
received upon issuance. Approximately $19.5 million of the gross proceeds were
contributed by the sole member of Coaxial LLC to certain related entities to
repay indebtedness. Approximately $9,750,000 was loaned to two related entities
("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC, which then contributed
that amount to certain other related entities to repay indebtedness. The debt
discount of $25,869,000 is being amortized over five years (until August 15,
2003). Interest on the Discount Notes accrues at 12 7/8% and is payable semi-
annually. All of the Discount Notes were allocated to Coaxial LLC.
The Discount Notes are non-recourse, secured by all of the common stock of
Coaxial Communications of Central Ohio, Inc. ("Coaxial") and the notes issued by
Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally guaranteed
by Insight Communications of Central Ohio, LLC ("Insight Ohio"), a subsidiary of
Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. The Company and Coaxial LLC
were in compliance with these covenants as of June 30, 1999.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Discount Notes will depend on the financial and operating
performance of Insight Ohio.
4. Commitments and Contingencies
The Company is party or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
of financial position.
11
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
Cash............. $ 2,265 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $438 and $306 in 1999 and 1998 969 1,186
Other accounts receivable, less allowance for doubtful accounts
of $145 in 1999 and 1998 1,629 1,520
Prepaid expenses and other current assets 237 166
------------- -----------------
Total current assets 5,100 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 80,698 71,032
Equipment 7,744 7,102
Furniture 349 333
Leasehold improvement 71 71
------------- -----------------
89,122 78,798
Less-Accumulated depreciation and amortization (50,122) (46,898)
------------- -----------------
Total property and equipment, net 39,000 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,385 7,385
Deferred financing costs and other 1,643 1,447
------------- -----------------
9,028 8,832
Less-Accumulated amortization (7,497) (7,399)
------------- -----------------
Total intangible assets, net 1,531 1,433
DUE FROM RELATED PARTIES 158 149
------------- -----------------
Total assets $ 45,789 $ 45,063
============= =================
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,171 3,230
Accrued interest 1,307 1,250
Accrued liabilities 4,716 4,404
------------- -----------------
Total current liabilities 10,267 9,007
Senior notes payable 34,435 34,435
Capital lease obligations 105 105
Other liabilities 1,172 1,146
Due to related parties 756 1,030
------------- -----------------
Total liabilities 46,735 45,723
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT):
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1999 and 1998 1 1
Paid-in capital 27,777 11,501
Accumulated (deficit) (28,724) (12,162)
------------- -----------------
Total shareholders' (deficit) (946) (660)
------------- -----------------
Total liabilities and shareholders' (deficit) $ 45,789 $ 45,063
============= =================
</TABLE>
See accompanying notes
12
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Operations and Changes
in Shareholder's (Deficit) Equity
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
TOTAL REVENUES $11,697 $11,784 $23,393 $23,268
OPERATING EXPENSES:
Service and administrative 6,560 7,384 13,241 14,867
Depreciation and amortization 1,647 1,372 3,247 2,688
------- ------- ------- -------
Total operating expenses 8,207 8,756 16,488 17,555
------- ------- ------- -------
OPERATING INCOME 3,490 3,028 6,905 5,713
OTHER INCOME 79 (59) 79 (115)
INTEREST INCOME (EXPENSE), net
Interest income--related parties - 1,115 - 2,183
Interest income 9 - 86 23
Interest expense--related parties - (403) - (792)
Interest expense (905) (874) (1,809) (1,680)
------- ------- ------- -------
Total interest (expense), net (896) (162) (1,723) (266)
------- ------- ------- -------
NET INCOME 2,673 2,807 5,261 5,332
SHAREHOLDERS' (DEFICIT) EQUITY, beginning of period (3,178) 55,709 (660) 54,327
CAPITAL DISTRIBUTIONS (441) - (5,547) (1,143)
------- ------- ------- -------
SHAREHOLDERS' (DEFICIT) EQUITY, end of period $ (946) $58,516 $ (946) $58,516
======= ======= ======= =======
EARNINGS PER COMMON SHARE:
Basic and Diluted $ 2,475 $ 2,599 $ 4,871 $ 4,937
======= ======= ======= =======
Weighted average number of common shares 1,080 1,080 1,080 1,080
======= ======= ======= =======
</TABLE>
See accompanying notes
13
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,261 $ 5,332
Adjustments to reconcile net income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3,322 3,037
Loss on disposals of property and equipment - 55
Changes in operating assets and liabilities
Subscriber receivables 217 555
Other accounts receivable, prepaid expenses and other
current assets (180) (1,040)
Accounts payable, accrued liabilities and other 1,279 408
Accrued interest 57 (170)
Due to related parties (283) -
--------- ---------
Net cash provided by operating activities 9,673 8,177
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (10,324) (2,759)
Increase in intangible assets (196) -
Due from related parties - (7,302)
--------- ---------
Net cash used in investing activities (10,520) (10,061)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - 1,250
Principal payments on notes payable - (57)
Principal payments on deferred compensation - (128)
Costs incurred in debt financing - (263)
Principal payments on capital lease obligations (50) (140)
Capital distributions (5,547) (1,143)
Increase in amounts due to related parties - 2,058
--------- ---------
Net cash (used in) provided by financing activities (5,597) 1,577
--------- ---------
NET (DECREASE) IN CASH (6,444) (307)
CASH, beginning of period 8,709 574
--------- ---------
CASH, end of period $ 2,265 $ 267
========= =========
</TABLE>
See accompanying notes
14
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio LLC ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
the eastern parts of Columbus, Ohio and surrounding areas. In connection with
the contribution of the Company's cable system described below, the issuance of
the Senior Notes described in Note 4(a), and the issuance of the Discount Notes
by the Company's majority shareholder and an affiliate during 1998, the three
individuals who previously owned the outstanding stock of the Company
contributed their stock to three separate limited liability companies.
Accordingly, at June 30, 1999, the Company was a subsidiary of Coaxial LLC,
which owns 67 1/2% of its outstanding stock.
Other related entities affiliated with Coaxial include Coaxial LLC, Coaxial
Financing Corp., Coaxial DJM LLC, Coaxial DSM LLC, Phoenix Associates
("Phoenix"), Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"),
Coaxial Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus
II ("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to Insight Ohio, a newly formed subsidiary. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns two
separate series of voting preferred equity (a $140 million preferred equity
interest and a $30 million preferred equity interest) of Insight Ohio. The
voting preferred equity interest will provide for distributions to Coaxial and
indirectly to Phoenix and Coaxial LLC in amounts equal to the payments required
on the senior and senior discount notes. IHO serves as the manager of Insight
Ohio.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
15
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at June 30, 1999, the accompanying financial statements include the accounts of
Insight Ohio. All intercompany balances have been eliminated in consolidation.
At June 30, 1999, Insight Ohio had a members' deficiency, accordingly, the
accompanying financial statements do not include a minority interest liability
for Insight's 75% common equity interest in Insight Ohio.
Cash
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current asset and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
At June 30, 1999, the carrying value of the Senior Notes approximate their fair
value.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at June 30, 1999 were not
significant.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of June 30, 1999, the Company
had no significant concentrations of credit risk.
16
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At June 30, 1999 the Company had net assets held under capital leases of
$178,000.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate to costs, primarily legal fees and bank facility
fees incurred to negotiate and secure long term financing (see note 4). These
costs are being amortized on a straight-line basis over the life of the
applicable loans. In connection with the issuance of the Senior Notes (see note
4), the Company repaid the outstanding indebtedness under its prior debt
facility. The Company amortized to interest expense deferred financing costs of
approximately $39,000 and $75,000 for the three and six months ended June 30,
1999 and $207,000 and $349,000 for the three and six months ended June 30, 1998.
Home Office Expenses
Home office expenses of approximately $336,000 and $731,000 for the three and
six months ended June 30, 1998 (included in selling and administrative expenses)
include billings for legal fees, management fees, salaries, travel and other
management expenses for services provided by an affiliated services company.
Effective August 21, 1998, IHO provides such services for which it earns a
management fee which approximated $351,000 and $727,000 for the three and six
months ended June 30, 1999.
17
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Earnings Per Share
In 1998, the Company adopted SFAS No. 128, "Earnings per Share" ("SFAS No.
128"), which established new standards for computing and presenting earnings per
share was effective for financial statements issued for periods ending after
December 15, 1997.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
4. Notes Payable
Notes payable at June 30, 1999 and December 31, 1998 consisted of:
Lender June 30, 1999 December 31, 1998
------ ------------- -----------------
Senior Notes(a) $ 34,435,092 $ 34,435,092
------------- -----------------
Total $ 34,435,092 $ 34,435,092
============= =================
Notes payable at June 30, 1999, will mature on August 15, 2006.
18
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interests to make payments
on the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
incurred financing fees of approximately $1,226,000 that are being
amortized over the life of the Senior Notes. Coaxial, as joint and several
issuer, with Phoenix, of the Senior Notes, provides the funding that will
allow Phoenix to repay its share of the notes payable, as Phoenix has no
operations.
Amortization expense for deferred financing costs related to the Senior
Notes for the three and six months ended June 30, 1999 was approximately
$39,000 and $75,000. Interest expense on Coaxial's portion of the Senior
Notes excluding amortization of deferred financing costs was approximately
$861,000 and $1,722,000 for the three and six months ended June 30, 1999.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
bank which provides for revolving credit loans of $25 million to finance
capital expenditures and for working capital and general purposes,
including the upgrade of the System's cable plant and for the introduction
of new video services. The Senior Credit Facility has a six-year maturity,
with reductions to the amount of the commitment commencing after three
years. The amount available for borrowing is reduced by any outstanding
letter of credit obligations. Insight Ohio's obligations under the Senior
Credit Facility are secured by substantially all the tangible and
intangible assets of Insight Ohio. Loans under the Senior Credit Facility
bear interest, at Insight Ohio's option, at the prime rate or at a
Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Discount Notes in the event of a payment default
under the Senior Credit Facility, create liens on assets, make investments,
make acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Senior Credit Facility requires
compliance with certain financial ratios, including with respect to total
leverage, interest coverage and pro forma debt service coverage. Management
does not expect that such covenants will materially impact the ability of
Insight Ohio to operate its business. As of June 30, 1999, no amounts were
drawn on the Senior Credit Facility.
19
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Commitments and Contingencies
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's results of operation or
financial position.
20
<PAGE>
Phoenix Associates
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ - $ -
Interest receivable 57 57
------------- -----------------
Total current assets 57 57
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net 3,410 3,400
------------- -----------------
Total other assets 4,366 4,356
------------- -----------------
Total assets $ 4,423 $ 4,413
============= =================
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
INTEREST PAYABLE $ 4,017 $ 3,841
NOTES PAYABLE 105,565 105,565
------------- -----------------
Total liabilities 109,582 109,406
------------- -----------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (105,159) (104,993)
------------- -----------------
Total liabilities and partners' deficit $ 4,423 $ 4,413
============= =================
</TABLE>
See accompanying notes
21
<PAGE>
Phoenix Associates
Statements of Operations and Change in Partners' Deficit
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
EXPENSES $ - $ 33 $ - $ 52
INTEREST EXPENSE (INCOME)
Interest income--related parties - (227) - (455)
Interest expense--related parties - 1,053 - 2,061
Interest expense 2,759 2,451 5,509 4,900
------------ ---------- ----------- ----------
Total interest expense, net 2,759 3,277 5,509 6,506
------------ ---------- ----------- ----------
NET LOSS 2,759 3,310 5,509 6,558
PARTNERS' DEFICIT, beginning of period 102,641 173,659 104,993 170,411
CAPITAL CONTRIBUTIONS (241) - (5,343) -
------------ ---------- ----------- ----------
PARTNERS' DEFICIT, end of period $105,159 $176,969 $ 105,159 $176,969
============ ========== =========== ==========
</TABLE>
See accompanying notes
22
<PAGE>
<TABLE>
<CAPTION>
Phoenix Associates
Statements of Cash Flows
(Unaudited)
(in thousands)
Six months ended
June 30,
1999 1998
-------------------------- ---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,509) $ (6,558)
Adjustments to reconcile net loss to
NET CASH USED IN OPERATING ACTIVITIES:
Amortization of deferred financing fees (10) -
Changes in operating assets and liabilities:
Other accounts receivable, prepaid expenses, and
other current assets - 1
Accrued interest 176 -
Accounts payable - 32
-------------------------- ---------------------------
Net cash used in operating activities (5,343) (6,525)
-------------------------- ---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in amounts due from related parties - (176)
-------------------------- ---------------------------
Net cash used in investing activities - (176)
-------------------------- ---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - (360)
Capital contributions 5,343 -
Increase in amounts due to related parties - 7,061
-------------------------- ---------------------------
Net cash provided by financing activities 5,343 6,701
-------------------------- ---------------------------
NET INCREASE (DECREASE) IN CASH - -
CASH, beginning of period - -
-------------------------- ---------------------------
CASH, end of period $ - $ -
========================== ===========================
</TABLE>
See accompanying notes
23
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 4, along with an affiliate, Coaxial Communications
of Central Ohio, Inc.
Phoenix is owned by three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Coaxial Communications of Central Ohio, Inc. ("Coaxial"),
Insight Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial
Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of
Columbus I ("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"),
Paxton Cable Television, Inc. ("Paxton Cable") and Paxton Communications, Inc.
("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which Coaxial contributed
substantially all of the assets and liabilities comprising its cable system to a
newly formed subsidiary, Insight Ohio, and Insight Holdings of Ohio, LLC
("IHO"), a wholly owned subsidiary of Insight, contributed $10 million in cash
to Insight Ohio. As a result of this Contribution Agreement, Coaxial owns 25% of
the non-voting common equity and IHO owns 75% of the non-voting common equity of
Insight Ohio. Coaxial also owns two separate series (a $140 million preferred
equity interest and a $30 million preferred equity interest of voting preferred
equity) of Insight Ohio. The voting preferred equity interest provides for
distributions to Coaxial equal in amount to the payments on the Senior Notes and
senior discount notes. Coaxial will make distributions which will enable Phoenix
to fund the required payments on the Senior Notes.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
24
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off- balance sheet financial instruments for which it is
practicable to estimate that value. At June 30, 1999, the carrying value of
Phoenix's financial instruments approximate fair value.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." Statement No.
133 established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Statement No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Phoenix does not anticipate that the
adoption of this Statement will have a material impact on its financial
statements.
4. Notes Payable
Notes payable at June 30, 1999 and December 31, 1998 consisted of:
<TABLE>
<CAPTION>
Lender June 30, 1999 December 31, 1998
------ --------------- -------------------
<S> <C> <C>
Senior Notes (a) $ 105,565,000 $ 105,565,000
--------------- -------------------
Total $ 105,565,000 $ 105,565,000
=============== ===================
</TABLE>
Notes payable at June 30, 1999, will mature on August 15, 2006.
25
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(a) On August 21, 1998 Coaxial and Phoenix completed an offering of $140
million 10% Senior Notes ("Senior Notes") due 2006. The proceeds of the
Senior Notes were allocated $105.6 million to Phoenix and $34.4 million
to Coaxial. Interest accrues on the Senior Notes from August 21, 1998
and is payable in cash semi-annually on each February 15 and August 15,
commencing on February 15, 1999. The Senior Notes are secured by the
outstanding Series A Preferred Interests in Insight Ohio. The Series A
Preferred Interests have a liquidation preference of $140 million and
pay distributions in an amount equal to the interest payments on the
Senior Notes. All Series A Preferred Interests are owned by Coaxial and
are pledged to Bank of Montreal Trust Company, as trustee, for the
benefit of the holders of the Senior Notes. Coaxial will utilize cash
distributions on the Series A Preferred Interests to make payments on
the Senior Notes including distributions to Phoenix. The Senior Notes
contain covenants that, among other things, restrict the ability of
Coaxial, Phoenix, Insight Ohio and any of their Restricted Subsidiaries
to: incur additional indebtedness; pay dividends and make
distributions; issue stock of subsidiaries to third parties; make
certain investments; repurchase stock; create liens; enter into
transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction
involving all or substantially all of the assets of Coaxial, Phoenix
and their Restricted Subsidiaries, taken as a whole; transfer or sell
assets; use distributions on the Series A Preferred Interest or Series
B Preferred Interests for any purpose other than required payments of
interest and principal on the notes or Discount Notes, respectively;
and swap assets. In connection with the issuance of the Senior Notes,
Phoenix incurred financing fees of approximately $3,800,000 that are
being amortized over the life of the Senior Notes. Amortization expense
related to the deferred financing costs was approximately $120,000 and
$231,000 for the three and six months ended June 30, 1999. Interest
expense incurred on the Senior Notes excluding amortization of deferred
financing costs was approximately $2,639,000 and $5,278,000 for the
three and six months ended June 30, 1999. Phoenix is a co-issuer and
joint and several obligor of the debt, along with an affiliate,
Coaxial.
At June 30, 1999 the carrying value of the Senior Notes payable approximate fair
value.
5. Commitments and Contingencies
The Company is party to or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
of financial position.
26
<PAGE>
Insight Communications of Central Ohio, LLC
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------ ----------------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 265 $ 6,709
Subscriber receivables, less allowance for doubtful
Accounts of $438 and $306 in 1999 and 1998 969 1,186
Other accounts receivable, less allowance for doubtful
Accounts of $145 in 1999 and 1998 1,629 1,520
Prepaid expenses and other current assets 237 166
---------------------- ------------------------
Total current assets 3,100 9,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 80,698 71,032
Equipment 7,744 7,102
Furniture 349 333
Leasehold improvements 71 71
---------------------- ------------------------
89,122 78,798
Less-Accumulated depreciation and amortization (50,122) (46,898)
---------------------- ------------------------
Total property and equipment, net 39,000 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,385 7,385
Other intangible assets 417 300
Less-Accumulated amortization (7,371) (7,348)
---------------------- ------------------------
Total intangible assets, net 431 337
DUE FROM RELATED PARTIES 158 149
---------------------- ------------------------
Total assets $ 42,689 $ 41,967
====================== ========================
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,171 3,230
Accrued liabilities 4,716 4,404
Series preferred A dividend payable 5,250 5,211
Series preferred B dividend payable 3,347 1,438
---------------------- ------------------------
Total current liabilities 17,557 14,406
Capital lease obligations 105 105
Other deferred credits 1,172 1,146
Due to related parties 756 1,029
Preferred A interest 140,000 140,000
Preferred B interest 30,000 30,000
---------------------- ------------------------
Total liabilities and preferred interests 189,590 186,686
Members' deficit (146,901) (144,719)
---------------------- ------------------------
Total liabilities and members' deficit $ 42,689 $ 41,967
====================== ========================
</TABLE>
See accompanying notes
27
<PAGE>
Insight Communications of Central Ohio, LLC
Statements of Operations and Changes in Members' Deficit
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
<S> <C> <C>
REVENUE $ 11,697 $ 23,393
OPERATING EXPENSES:
Service and administrative 6,560 13,241
Depreciation and amortization 1,647 3,247
------------------ ----------------
Total operating expenses 8,207 16,488
------------------ ----------------
OPERATING INCOME 3,490 6,905
OTHER INCOME 79 79
Interest expense (6) (12)
Interest income 9 86
------------------ ----------------
INTEREST INCOME (EXPENSE), net 5 74
------------------ ----------------
NET INCOME 3,572 7,058
Accrual of preferred interests (4,499) (8,721)
------------------ ----------------
Loss on common interests (927) (1,663)
MEMBERS' DEFICIT, beginning of period (145,454) (144,718)
Capital Distributions (520) (520)
------------------ ----------------
Members' Deficit at June 30, 1999 $ (146,901) $ (146,901)
================== ================
</TABLE>
See accompanying notes
28
<PAGE>
Insight Communications of Central Ohio, LLC
Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION> Six months ended
June 30, 1999
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,058
Adjustments to reconcile net income to
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 3,247
Changes in certain assets and liabilities
Subscriber receivables 217
Other accounts receivable, prepaid expenses and other current asset (180)
Accounts payable, accrued liabilities and other 1,274
Due to affiliated companies (282)
----------------
Net cash provided by operating activities 11,334
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (10,324)
Increase in other intangible assets (117)
----------------
Net cash used in investing activities (10,441)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Distributions (520)
Principal payments on capital lease obligations (50)
Preferred interest distributions (6,767)
----------------
Net cash used in financing activities (7,337)
----------------
NET INCREASE IN CASH (6,444)
CASH, beginning of period 6,709
----------------
CASH, end of period $ 265
================
</TABLE>
see accompanying notes
29
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
was formed on July 23, 1998 in order to acquire substantially all of the assets
and liabilities comprising the cable television system of Coaxial Communications
of Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A and Series B Preferred Interests"). In
conjunction therewith, Insight Holdings of Ohio, LLC ("IHO") contributed $10
million in cash to Insight Ohio for which it received a 75% non-voting common
membership interest in Insight Ohio. Insight Ohio provides basic and expanded
cable services to homes in Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by all issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount Notes"). The
Discount Notes have a face amount of $55,869,000 and approximately $30 million
of gross proceeds were received upon issuance. The Discount Notes are non-
recourse, secured by 100% of the common stock of Coaxial, and conditionally
guaranteed by Insight Ohio.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
3. Summary of Significant Accounting Policies
Cash
Insight Ohio considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
30
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at June 30, 1999 were not
significant.
Concentration of Credit Risk
Financial instruments that potentially subject Insight Ohio to concentrations of
credit risk consist principally of trade accounts receivable. Insight Ohio's
customer base consists of a number of homes concentrated in the central Ohio
area. Insight Ohio continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of June 30, 1999, Insight Ohio
had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
Assets held under capital leases at June 30, 1999 were $178,000.
Insight Ohio internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Insight Ohio reviews its property, plant and equipment and other long term
assets when events or changes in circumstances indicate the carrying amounts may
not be recoverable. When such conditions exist, management estimates the future
cash flows from operations or disposition. If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount would be recorded, and an impairment loss would be
recognized. Insight Ohio does not believe that there is an impairment of such
assets.
Franchise Costs
Franchise costs are amortized using the straight-line method over the lives of
the related franchises which range from 7 to 15 years.
31
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Home Office Expenses
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee of equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under this management agreement aggregated $351,000 and $727,000 for the
three and six months ended June 30, 1999.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
4. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a bank
which provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity, with reductions to the amount of
the commitment commencing after three years. The amount available for borrowing
is reduced by any outstanding letter of credit obligations. Insight Ohio's
obligations under the Senior Credit Facility are secured by substantially all
the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities. As of
June 30, 1999, no amounts were drawn on the Senior Credit Facility.
5. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Forward-Looking Statements
This report contains "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import, which concern, among other things, the operations, economic performance
and financial condition of the System (as defined below), including, in
particular, the likelihood of the System's success given its new management by
Insight Holdings of Ohio, LLC ("IHO"). All statements other than statements of
historical fact included in this report regarding Coaxial LLC, Coaxial Financing
Corp. and Insight Communications of Central Ohio, LLC ("Insight Ohio") or any of
the transactions described in this report, including the timing, financing,
strategies and effects of such transactions, are forward-looking statements.
Such forward-looking statements are based upon a number of assumptions and
estimates, which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of Coaxial LLC, Coaxial
Financing Corp. and Insight Ohio, and reflect future business decisions which
are subject to change. Although Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio believe that the expectations reflected in such forward-looking statements
are reasonable, they can give no assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from expectations include, without limitation, (i) the ability of
Coaxial LLC and Coaxial Financing Corp. to make scheduled payments with respect
to the Discount Notes (as defined below) will depend on the financial and
operating performance of Insight Ohio; (ii) a substantial portion of Insight
Ohio's cash flow from operations is required to be dedicated to the payment of
principal and interest on its indebtedness and the required distributions with
respect to the Series A Preferred Interests (as defined below) and the Series B
Preferred Interests (as defined below), thereby reducing the funds available to
Insight Ohio for its operations and future business opportunities; (iii) Coaxial
LLC and Coaxial Financing Corp have no significant assets other than the common
equity of Coaxial Communications of Central Ohio, Inc. ("Coaxial") owned by
Coaxial LLC and notes issued by Coaxial DJM LLC (an owner of 22.5% of the common
equity of Coaxial) and Coaxial DSM LLC (an owner of 10.0% of the common equity
of Coaxial) to Coaxial LLC; and (iv) the indenture governing the terms of the
Discount Notes imposes restrictions on Coaxial LLC, Coaxial Financing Corp. and
Insight Ohio and the Senior Credit Facility of Insight Ohio imposes restrictions
on Insight Ohio. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not
intend to update these forward-looking statements.
Private Offering of Senior Discount Notes, Senior Notes and Acquisition of
System by Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a
private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their Senior Discount Notes in connection with
the Financing Plan discussed below, which included the contribution of Coaxial's
cable television system (the "System") to Insight Ohio. Coaxial LLC and Coaxial
Financing Corp. have only nominal assets except for Coaxial LLC's ownership of
67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC and Coaxial
DSM LLC, which are secured by the remaining 32.5% of the common stock of
Coaxial. The Senior Discount Notes are guaranteed on a conditional basis by
Insight Ohio. The limited liability companies that own Coaxial are referred to
herein as the "Individual LLCs".
On August 21, 1998, a Financing Plan was implemented to facilitate the
organization of Insight Ohio, the acquisition of the System by Insight Ohio and
to provide for the System's liquidity and operational and financial flexibility.
Pursuant to the Financing Plan:
. Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting
33
<PAGE>
Series A Preferred Interest and Series B Preferred Interest in Insight Ohio
(together the "Preferred Interests"), which provide for distributions to
Coaxial that will be used to pay interest and principal on the Senior Notes
and to pay dividends to the Individual LLCs that will be used to pay
interest and principal on the Senior Discount Notes;
. IHO contributed $10.0 million in cash to Insight Ohio for which it received
a 75% non-voting common membership interest in Insight Ohio;
. Coaxial and Phoenix effected the Senior Notes Offering;
. Coaxial LLC and Coaxial Financing Corp. effected the Senior Discount Notes
Offering; and
. a portion of the existing bank indebtedness of Coaxial and Phoenix and
certain of their affiliates was repaid and the balance was purchased by CIBC
Oppenheimer Corp. ("CIBC") and restructured in accordance with an agreement
among the parties.
As part of the Financing Plan, Coaxial and Phoenix Associates, an affiliated
general partnership, completed a private offering (the "Senior Notes Offering")
of $140,000,000 aggregate principal amount of their Senior Notes. The Senior
Notes are also guaranteed on a conditional basis by Insight Ohio. The
conditional guarantee of the Senior Discount Notes is subordinated to the
conditional guarantee of the Senior Notes. As a result of the Financing Plan,
Coaxial has only nominal assets except for its ownership of 25% of the non-
voting common membership interests in Insight Ohio and 100% of the voting
Preferred Interests.
The gross proceeds received by Coaxial LLC and Coaxial Financing Corp. from
the Senior Discount Notes Offering were approximately $30.0 million. Proceeds
from such private offering were used for the repayment of outstanding
indebtedness (approximately $28.9 million). CIBC purchased certain outstanding
indebtedness (approximately $136.4 million) of Coaxial and Phoenix and
restructured that debt in accordance with the Financing Plan. CIBC funded such
purchase with proceeds from the Senior Notes Offering. The remaining proceeds
from the Senior Notes Offering and the Senior Discount Notes Offering and the
$10.0 million cash contribution from IHO were used for working capital
(approximately $2.9 million), deferred compensation and severance payments
(approximately $3.0 million) and fees and expenses (approximately $8.8 million).
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series A Preferred
Interests will be used to pay interest and principal on the Senior Notes and the
distributions from the Series B Preferred Interests will be used to pay
dividends to the Individual LLCs, which dividends will be used to pay interest
and principal on the Senior Discount Notes. Distributions by Insight Ohio will
be subject to certain financial covenants and other conditions set forth in its
Senior Credit Facility.
Coaxial LLC does not conduct any business and is dependent upon the cash
flow of Insight Ohio to meet its obligations under the Senior Discount Notes.
IHO, a wholly-owned subsidiary of Insight, serves as the manager of the Insight
Ohio.
The following discussion relates to the historical operations of Coaxial LLC
for the three and six month periods ended June 30, 1999 compared to the
historical operations of Coaxial for the three and six months ended June 30,
1998. On August 21, 1998, substantially all of the assets and liabilities
comprising the System were contributed to Insight Ohio. Subsequent to the
consummation of the Financing Plan, Insight Ohio was deemed to be a subsidiary
of Coaxial and, as such, the financial statements of Insight Ohio are
consolidated into the financial statements of Coaxial and Coaxial was deemed to
be a subsidiary of Coaxial LLC and, as such, the financial statements of Coaxial
are consolidated into the financial statements of Coaxial LLC. Financial results
related to historical information reflect the operation and management of the
System by Coaxial through August 21, 1998 and by IHO from August 21, 1998 to
June 30, 1999. The historical operating results of Coaxial LLC presented below
reflect the actual results of the System in addition to certain financing
activities unrelated to the operation of the System. These financing activities
34
<PAGE>
relate primarily to the offering of the Senior Discount Notes and Senior Notes
discussed above as well as certain borrowings and repayments of debt with
affiliated companies. These activities resulted in related financing and
interest costs. The historical results of Coaxial LLC presented below appear
elsewhere in this report under the heading "Coaxial LLC."
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic customers to commence or discontinue service, pay-per-view
charges, late payment fees, franchise fees, advertising revenues and commissions
related to the sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses,
home office expenses and depreciation and amortization. Service and
administrative expenses include direct costs, such as fees paid to programming
suppliers, expenses related to copyright fees, bad debt expense, and franchise
and use fees. Programming fees have historically increased at rates in excess of
inflation due to increases in the number of programming services offered by the
System and improvements in the quality of programming. Service and
administrative expenses also include costs attributable to the operation of the
System, including wages and salaries and other expenses related to plant
operating activities, customer service operations, marketing, billing,
advertising sales and video production. Prior to August 21, 1998, service and
administrative expenses also included costs attributable to finance and
accounting, human resources and other administrative functions. Upon
consummation of the Financing Plan, such expenses were replaced by the
management fee arrangement with IHO.
The System relies on IHO for all of its strategic, managerial, financial and
operational oversight and advice. IHO also centrally purchases programming and
equipment and provides the associated discount to the System. In exchange for
all such services provided to the System and subject to certain restrictions
contained in the covenants with respect to Insight Ohio's Senior Credit
Facility, the Senior Notes and the Senior Discount Notes, IHO is entitled to
receive management fees of 3.0% of gross operating revenues of the System. Such
management fee is payable only after distributions have been made in respect of
the Preferred Interests and only to the extent that such payment would be
permitted by an exception to the restricted payments covenants of the Senior
Notes and the Senior Discount Notes as well as Insight Ohio's Senior Credit
Facility. Such management fee is included in service and administrative
expenses.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues for the three months ended June 30, 1999 were $11.7 million,
compared to $11.8 million for the three months ended June 30, 1998. For the
three months ended June 30, 1999, subscribers served averaged 85,995, as
compared with 91,476 during the same time period in 1998. Revenues remained
essentially flat despite a 6.0% decrease in customers as Insight Ohio ended
previous management's program of deeply discounting its rates. Average revenue
per customer per month for the three months ended June 30, 1999 totaled $45.34
versus $42.99 for the three months ended June 30, 1998.
Service and administrative expenses decreased to $6.5 million for the three
months ended June 30, 1999, compared to $7.4 million for the three months ended
June 30, 1998 a decrease of $824,000 or 12.1%. Basic programming expenses
decreased by 10.2%, from $2.0 million in 1998 to $1.7 million in 1999,
reflecting savings realized through Insight's purchasing discounts. Similarly,
pay programming expenses dropped 18.6% during the three months ended June 30,
1999 versus the three months ended June 30, 1998 to $920,000. The System was
charged home office expenses that included costs incurred by the owners of
35
<PAGE>
Coaxial and their direct employees relating to the System including salaries,
benefits, legal fees, travel and entertainment, accounting fees and other office
expenses. For the three months ended June 30, 1998, such expenses totaled
approximately $336,000. Upon consummation of the Financing Plan, IHO commenced
management services to the System for which it receives a management fee, which
totaled approximately $351,000 for the three months ended June 30, 1999.
Personnel costs for the three months ended June 30, 1999 totaled approximately
$1.4 million, a decrease of 17.0% from the three months ended June 30, 1998 as
the Insight Ohio eliminated duplicative positions upon consummation of the
Financing Plan.
Depreciation and amortization expenses for the three months ended June 30,
1999 increased by 20.0% over the three months ended June 30, 1998 to
approximately $1.6 million reflecting additional capital expenditures incurred
associated with the rebuild of the System's network. Operating income for the
three months ended June 30, 1999 totaled $3.5 million, a 15.3% increase over
operating income of $3.0 million reported for the three months ended June 30,
1998.
Net interest expense totaled approximately $1.6 million for the three months
ended June 30, 1999 primarily reflecting interest on the Senior Discount Notes
and Senior Notes issued August 21, 1998.
Net income decreased to $2.0 million for the three months ended June 30, 1999
from net income of $2.8 million for the three months ended June 30, 1998 for the
reasons set forth above.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $23.4 million, compared
to $23.3 million for the six months ended June 30, 1998. For the six months
ended June 30, 1999, subscribers served averaged 86,503, as compared with 91,481
during the same time period in 1998. Revenues remained essentially flat despite
a 5.4% decrease in customers as Insight Ohio ended previous management's program
of deeply discounting its rates. Average revenue per customer per month for the
six months ended June 30, 1999 totaled $45.07 versus $42.39 for the six months
ended June 30, 1998.
Service and administrative expenses decreased to $13.2 million for the six
months ended June 30, 1999, compared to $14.9 million for the six months ended
June 30, 1998 a decrease of $1.7 million or 11.4%. Basic programming expenses
decreased by 12.5%, from $4.0 million in 1998 to $3.5 million in 1999,
reflecting savings realized through Insight's purchasing discounts. Similarly,
pay programming expenses dropped 14.5% during the six months ended June 30, 1999
versus the six months ended June 30, 1998 to $1.9 million. The System was
charged home office expenses that included costs incurred by the owners of
Coaxial and their direct employees relating to the System including salaries,
benefits, legal fees, travel and entertainment, accounting fees and other office
expenses. For the six months ended June 30, 1998, such expenses totaled
approximately $731,000. Upon consummation of the Financing Plan, IHO commenced
management services to the System for which it receives a management fee, which
totaled approximately $727,000 for the six months ended June 30, 1999. Personnel
costs for the six months ended June 30, 1999 totaled approximately $2.8 million,
a decrease of 16.9% from the six months ended June 30, 1998 as the Insight Ohio
eliminated duplicative positions upon consummation of the Financing Plan.
Depreciation and amortization expenses for the six months ended June 30, 1999
increased by 20.8% over the six months ended June 30, 1998 to approximately $3.3
million reflecting additional capital expenditures incurred associated with the
rebuild of the System's network. Operating income for the six months ended June
30, 1999 totaled $6.9 million, a 21.0% increase over operating income of $5.7
million reported for the six months ended June 30, 1998.
Net interest expense totaled approximately $3.2 million for the six months
ended June 30, 1999 primarily reflecting interest on the Senior Discount Notes
and Senior Notes issued August 21, 1998.
Net income decreased to $3.8 million for the six months ended June 30, 1999
from net income of $5.3 million for the six months ended June 30, 1998 for the
reasons set forth above.
36
<PAGE>
Liquidity and Capital Resources
The cable television business is a capital-intensive business that generally
requires financing for the upgrade, expansion and maintenance of the technical
infrastructure. The capital expenditures relating to Coaxial totaled $4.2
million and $10.3 for the three and six months ended June 30, 1999. These
expenditures were primarily for the rebuild of cable plant and for serving new
homes. Capital expenditures are financed by cash received from the Financing
Plan and cash flows from operations.
IHO is rebuilding the technical platform of the System by upgrading the plant
serving the majority of customers. The capability for high-speed data
transmission, impulse pay-per-view, digital tiers of service and additional
analog channels is intended to be provided by further deployment of fiber
optics, an increase in the bandwidth to 870 MHz, activation of the reverse plant
to allow two-way communications and the installation of digital equipment.
In addition to cash flow from operations, Insight Ohio has available a $25
million Senior Credit facility to support their rebuild program. As of June 30,
1999, no borrowings had been made under the Senior Credit Facility and $25
million remains available for borrowing.
Inflation and Changing Prices
Coaxial LLC's costs and expenses are subject to inflation and price
fluctuations. Although changes in costs can be passed through to customers, such
changes may be constrained by competition. Management does not expect inflation
to have a material effect on Coaxial LLC's results of operations.
Year 2000
The Year 2000 will pose a unique set of challenges to those industries
reliant on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. Insight
Ohio and other companies in the same business are vulnerable to their dependence
on distribution and communications systems.
Insight Ohio's greatest Year 2000 exposure is presented by its third party
billing system which is responsible for mailing monthly bills to customers and
maintaining customer data. Insight Ohio has recently implemented the Convergys
billing system. Convergys has informed Insight Ohio that testing of the billing
system was completed by the first quarter of 1999.
Management believes that the remaining systems of Insight Ohio will be fully
Y2K compliant by the end of the third quarter of 1999. Insight Ohio has
completed an inventory of all areas which are at risk and is in the process of
replacing and upgrading all equipment and software as needed. Due to Insight's
affiliation with TCI, Insight Ohio is a member of TCI's Year 2000 task force.
This allows Insight Ohio access to TCI's extensive database which details
various vendors', suppliers' and programmers' Year 2000 compliance. Management
estimates that the total cumulative costs relating to its efforts to make its
systems Y2K compliant will be approximately $120,000, of which approximately
$20,000 has been incurred as of June 30, 1999.
Management believes that the expenditures required to bring Insight Ohio's
systems into compliance will not have a materially adverse effect on Insight
Ohio's performance. However, the Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future financial results.
37
<PAGE>
Moreover, to operate its business, Insight Ohio relies on governmental
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. Insight Ohio's ability to conduct its business is dependent upon
the ability of these third parties to avoid Year 2000 related disruptions.
Insight Ohio is in the process of contacting its third party service providers
about their Year 2000 readiness, but Insight Ohio has not yet received any
assurances from any such third parties about their Year 2000 compliance. If
Insight Ohio's key third party service providers do not adequately address their
Year 2000 issues, Insight Ohio's business may be materially affected, which
could result in a materially adverse effect on Insight Ohio's results of
operations and financial condition.
Insight Ohio has not, as of yet, developed any contingency plans, as such
plans will depend on the responses from its third party service providers, in
the event Insight Ohio or any key third party providers should fail to become
Year 2000 compliant.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not
anticipate the adoption of this statement to have a material impact on their
respective financial statements.
38
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not engage in
trading market risk sensitive instruments and do not purchase hedging
instruments or "other than trading" instruments that are likely to expose any of
them to market risk, whether interest rate, foreign currency exchange, commodity
price or equity price risk. Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio have not entered into forward or future contracts, purchased options or
entered into swaps.
39
<PAGE>
PART II - OTHER INFORMATION PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule of Coaxial LLC
27.2 - Financial Data Schedule of Coaxial Financing Corp.
27.3 - Financial Data Schedule of Insight Communications of Central
Ohio, LLC
(b) Reports on Form 8-K
None
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial LLC
(Registrant)
Dated: August 16, 1999
By: /s/ Michael S. Willner
-----------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
-----------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial Financing Corp.
(Registrant)
Dated: August 16, 1999
By: /s/ Michael S. Willner
-----------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
-----------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Insight Communications of Central Ohio, LLC
(Registrant)
Dated: August 16, 1999
By: /s/ Michael S. Willner
-------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
-------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
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<NAME> COAXIAL LLC
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001071001
<NAME> COAXIAL FINANCING CORP.
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT
COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) FOR JUNE 30, 1999 AND
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001070242
<NAME> INSIGHT COMMUNICATIONS OF CENTRAL OHIO
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED) FOR JUNE 30, 1999 AND CONSOLIDATED
STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
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